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Banbury Cross

a pillow for lost thoughts...

Post details: Close to the edge

Close to the edge

So the big drama of the fiscal cliff ended just as we expected.

With our banged up federal bus teetering precariously over the edge, its nose sticking unsupported into the precipice, its wheels still spinning from the wild ride that lead to this moment, our elected representatives carefully tiptoed to the back of the bus and in the eleventh hour eked out an uneasy compromise which raised taxes on the rich and postponed all other important decisions by a few months.

Sadly - this noble effort drilled barely a dent into the problem of unsustainable deficits. Indeed, the public pail is as leaky as it was before, but in the spirit of positive thinking we might call it a promising start. Sure many on the right have decried the higher taxes on the "job creators" and attacked them viciously, but to me this small step toward righting our fiscal ship seems more than fair. Many of the services we pay for - whether it is the functioning infrastructure, backstopping the financial system or keeping the global trading routes safe - benefit owners of the capital more than rank and file members of the labor force, so it makes sense that those who are more invested in the safe and orderly social environment should support its protection a little bit more as well. Not to mention that hiking the upper bracket may help alleviate the ever widening wealth inequality which has been on the rise for the past several decades and slowly decimates the once thriving middle class.

But not everyone sees it that way. For some, higher taxes are the enemy number one regardless of the state of public coffers. One of the main arguments coming from the foot soldiers of Grover Norquist's Army is that many high income earners may not be willing to produce under such oppressive conditions. That they won't have enough incentives to create and innovate if government takes extra 3% from their paychecks.

I think such fears are greatly exaggerated. First, the resulting 40% is still generous compared to the top rates we had under Kennedy or Eisenhower. And second, those who won't be willing to take the deal can be replaced by those who will. That is the beauty of free markets - they work in many settings. Those entangled networks of interlocking economic and social mechanism have the wonderful property that they automatically seek optimal solutions. Isn't it strange that we use their power in determining (and optimizing) worker wages, but when it comes to taxes, especially in the higher brackets, we let lobbyists determine their magnitude?

Let's see how this works. You pay your laborers the lowest price at which someone qualified would be willing to take the job (as opposed to selling his or her expertise elsewhere). If someone is willing to do what you demand for $10, why would you pay them $12? Now let's apply the same principle on the taxation side. If someone qualified is willing to take a position with a 40% salary tax, why would we give it to someone insisting on the 36% tax. If you are unwilling to pay higher taxes on your generous compensation package, you are free to vacate your position to someone who will.

For every entrepreneur, there is someone with a similar idea just waiting in the woodworks, someone whose dreams went unrealized because the market had already been saturated. For every well paid manager there are many deputies or associates who have the same skills and are eager to prove it. In other words, we should let the free markets help us determine the proper level of taxation as well. Of course, that assumes that the whole system will not overspend, because in that case the overall tax burden would derail the whole economy. In other words, we'd need to stick pretty close to a balanced budget.

In economy, however, nothing is ever certain. This idea may not work for million reasons. But granted how dysfunctional our present system is, we should look for alternatives. I think if we managed to control the spending (by limiting deficits) and applied market principles to all components of the system, we might just arrive at an elusive equilibrium that is the hallmark of a properly functioning society. That magical point where public welfare is low enough to provide sufficient motivation to work, where workers make enough to sustain their families, and innovators and risk takers can still keep enough of their profits to make the risks worth their effort.

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